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Private Equity
Fund Structure - Best Practices
June 24th, 2014
Private Equity – Overview
What It Is
What To Look For
Private Equity investors raise capital from limited partners, and the investment
professionals (who serve as the General Partner) deploy that capital by investing
in private investments into (typically) private companies
Private Equity generally encompasses the following types of investment
 Buyouts
 Growth Capital
 Restructuring
 Special Situations
Over the last dozen years, Private Equity has greatly outperformed both Venture
Capital and Public Markets (stock market) investing
 Less volatile (not looking at daily market fluctuations)
 Actively managed
 Higher historical returns
Private Equity Investing does have some drawbacks:
 Investments in private equity are not immediately liquid
 Ability to invest through retirement accounts mitigates this drawback
 Once you commit, you are committed
There are some hallmarks of good Private Equity firms:
 Alignment of interests
 Experienced General Partners who know the market
 Reasonable fee structure
 A strategy that is differentiated and makes sense
Private Equity Fund Structure - Best Practices
Strong General Partner
• Personal Characteristics
• Honesty
• Integrity
• Transparency
• Strong communication skills
• Experience
Willingness to put Investors’ interests before the GP’s interests
Complementary skill sets among General Partner team
Experience working together as a team
Operational experience and management expertise
Ability to generate proprietary deal flow
Strong advisory board
Portfolio company references
Limited partner references
Track Record
• Prior track record does not insure continued and future success
• Demonstrated performance over time
• Top quartile performance of prior funds
• Ability to manage through
difficult economic periods
or portfolio company
• Board seat(s) at the
portfolio companies
• Participation in audit, compensation,
and executive committees
• Successful exits of prior
portfolio companies
Best Practices
LP Governance Committee
Quarterly and annual reporting
Annual audit
Mark-to-market valuation of portfolio
Key-man life insurance on GP principals
Professional advisors (experienced attorneys and accountants)
Advisors with industry related subject matter expertise
Disciplined and consistent investment thesis
Formal due diligence process
ILPA Guidelines
GP consideration of Environmental, Social and Governance issues
• United Nations Global Compact
• United Nations Principles for Responsible Investment (PRI)
• Private Equity Growth Capital Council’s Guidelines for Responsible
Clear Investment Objective and Thesis
Type of target portfolio companies (stage)
Type of investment security preferred
Range of investment size
Anticipated holding period
Sector specific vs. geographic focus
Approach to generating returns
Size of investment
Use of co-investor syndicates
Likely or preferred exit strategies
100 Day Plan
Annual Operating Plan
• Investments are illiquid – limited cash flow over initial years – a “J”
curve return model
• Financial commitment extends over a period of years
• Penalties for failing to
make capital calls
• Partnership interests are
not readily transferable
• Management influence limited
Expected LP Agreement Terms
Minimum investment amount
LP minimum annual preferred return
LP co-investment opportunities
Management Fee - 1.0% - 2.5% of committed capital (reduced over time)
GP Carried Interest – 20%
Vesting of GP carry over 5+ years
GP capital commitment >1% of total equity
GP capital commitment made in hard dollars i.e. cash
Return of capital and expenses to LPs before distribution to GP
Claw-back provision for GP distributions
Investment committee authorizes investment
Limit on next fund activities until 70% deployed or committed
Provision a “Key Person” event (i.e. suspension of investing)
Prohibition against LP borrowing except on a short-term basis
In Summary
Look for:
a General Partner you can trust…
• with a track record of working successfully as a team…
• With solid investor and CEO references…
• And a history of generating above market returns.
Make sure they are committed to:
• putting your best interest ahead of their own…
• and operating in accordance with industry best practices…
• and ethical standards.